Economics 111.3 Winter 14 March 24 th, 2014 Lecture 26 Ch. 12: Perfect competition

Economics 111.3 Winter 14

March 24th, 2014Lecture 26

Ch. 12: Perfect competition

FINAL EXAM is based on chapters 3, 4, 5 (up to p. 116), 6 (up to p. 138), 8, 9, 10 (up to p. 230, 11, 12, 13, and 14Its format: 100 Multiple-Choice Questions When and Where: April 21, from 7:00 p.m. to 10:00 p.m; STM 140Extra Office Hours: April 19, from1:00 p.m. to 3:00 p.m.

Final Exam:

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In part (c) price is less than average total cost and the firm incurs an economic loss—economic profit is negative.

Output, Price, and Profit in the Short Run

P = 131

Loss-Minimizing Case

• Suppose price falls from $131 to $81…

Q TFC TVC TC

0 $100 $ 0 $ 100

1 100 90 190

2 100 170 270

3 100 240 340

4 100 300 400

5 100 370 470

6 100 450 550

7 100 540 640

8 100 650 750

9 100 780 880

10 100 930 1030

MC MR

$ 90 $81

80 81

70 81

60 81

80 81

90 81

110 81

130 81

150 81

]]]]]]]]]

550/6

Shutdown ConditionMR =MC = min AVC

• A competitive firm will maximize profit or minimize losses in the short-run by producing that output at which MR=P=MC, provided that market price (P) exceeds minimum AVC

Short-run supply curve

• Short-run supply curve is the portion of the firm’s marginal cost curve lying above its average variable cost curve

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Short-run supply curve is the portion of the firm’s marginal cost curve lying above its average variable cost curve

Short-Run Supply Curve

Q Q

P PTotal

IndustryDemand

IndustryFirm(price taker)

Firm & Industry

D

8000

D

IndustryFirm(price taker)

$111

MC

Q Q

P P S=MCs

MC

AVC

8000

D

S=MCs

IndustryFirm(price taker)

The firm “takes”the industry price

The firm “takes”the industry price

$111

Q Q

P P

MC

AVC

8

D

8000

D

$111$111

1000 firmsIndustryFirm

(price taker)

Q Q

P P S=MCs

Q Q

P P

MC

AVC

ATC

8

D

8000

D

$111$111

IndustryFirm(price taker)

EconomicProfit

EconomicProfit

S=MCs

Profit Maximization in the Long Run

• Assumptions:–entry and exit only–identical costs–constant-cost industry

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© 2010 Pearson Education Canada

Long-run Equilibrium• if price > min ATC

– profits attract new firms– as S increases, price drops to min ATC

• if price < min ATC– losses cause firms to exit– as S decreases, price rises to min ATC

• so, in the long run, p=min ATC

Long-Run Equilibrium